National Instruments Corporation (NASDAQ:NATI)
Bank of America Global Technology Conference
June 04, 2013 4:00 PM ET
Alex Davern – CFO and COO
The next company presenting is National Instruments and we are fortunate enough to have Alex Davern, the COO and the CFO here is going to go on a short presentation and we are going to open up for Q&A. Alex?
Thanks so much Chris. Good afternoon. Thank you for your time and attention today. As Chris said, my name is Alex Davern, I am the Chief Operating Officer of National Instruments. I joined the company back in 1994. So I have been with the business for a quite a bit of this revenue growth, you see on the slide in front of you.
National Instruments is the leader in computer-based measurement and automation. Our mission in life is to make engineers’ time gets more productive to advanced discovery and we do that by disrupting the traditional instrument business that I’ll show as we go through.
We did little over $1.1 billion in revenue last year. We had very consistent growth over the decades outside of the two major global industrial recessions that we’ve seen in that time period back in 2001 as we saw our diverse business get impacted when many industries were under pressure, we returned to growth in 2002, had a record year in 2003 and then doubled the size of the company between 2003 and 2005 organically.
We then saw an impact from the broad great recession in 2009 rapidly recovered to record revenue in 2010 and on to new records in 2011 and 2012. When we look at the vision for the business, we look at the evolution of instrumentation over the course of the decades in three basic forms. One being vacuum tubes which was really the business that how it was run in its early days and then in the next thirty years or so, transistors and instrumentation led by what was Hewlett-Packard at the time, transitioned the market to electronics.
As we look at the platform approach of companies today, we are seeing the transition of the instruments world away from the power transistors towards software as the driving force of value and software built on common off to shelf harbor platforms that allow very strong performance.
Now what we do at National Instruments is we break the instrument mystery down into its core elements. In order to take a measurement, most measurements we are trying to take involve analog phenomena, whether it’s my voice or electrical current or wave forms from an RF device and you need to be able to convert the analog to digital.
You need a computing platform to process the digital data and then you need software to interpret the digital data to allow you to present your various different results.
At National Instruments, we disaggregate the traditional approach. We deliver measurement science of the plug-in board that could be coupled with standard PCs, we use a very high powerful LabVIEW software to allow the engineer and scientist to build custom applications around that measurement how we deliver system level platforms that allow our customers to extend those measurement platforms to their custom applications.
At the heart of our business is an application software product called LabVIEW. LabVIEW was first introduced to the market in on a Macintosh that make it fixed. The vision for LabVIEW is to be the spreadsheet for scientists and engineers. Scientists and engineers learn the language of building systems through a graphical flow chart or block diagram approach in engineering school.
The premise behind LabVIEW as a graphical portraying languages as you design the data flow you are competing the application program itself directly. So it’s an abstraction of measurement for engineering applications. That’s a very highly productive tool for scientists and engineers and it’s the dominant application software for building measurement systems in the world today.
Now LabVIEW spans from the incredibly easy to use, so LEGO is one of our largest OEMs in terms of unit volume. So LEGO is a toy company, their most successful product in their history is a robotics building set that allows children to build autonomous robots. That’s an OEM version of our LabVIEW application.
Again, abstracting the problem to a very high level certain age levels can build autonomous robotics. It spans in all the way to the SpaceX launch control application which again was built in our LabVIEW framework, so we are able to get from the very simple to use, very broad based but it’s also an incredibly powerful tool building some of the most sophisticated scientific instruments on the planet and its ability to span, and easy to use application is also very powerful that’s allowed us to be able to deploy LabVIEW to millions of different applications.
Now our vision for instrumentation is to be able to satisfy a greater scope of the measurement world we are commercial off the shelf technology. If we look at the world of measurement on it’s a chart in front of you, here the vertical axis here represents the accuracy with which you want to measure the signal expressed in bits of resolution. Think of it in terms of do I want to measure temperature for example within 1 degree in this room or within about a 11 degree in a wafer.
On a horizontal axis you have the speed of the analog ray form we are trying to capture. We are aging all the way from my voice let’s go current engine vibration as you move further add it to the gigahertz range into RF signals and all the wireless domain that was so familiar with.
The green shaded area represents the state of art of our technology in 1995 when we went public. We could measure up to 1 megahertz using commercial technology. The orange line here represents the state of the art of our box instrument competitors today and then the blue line represents where we are in 2012.
And what you see from this is over time our ability to leverage commercial technology has allowed us to reach a stage for over a fairly wide degree of the overall spectrum we are able to provide the highest performance, most accurate measurement devices on the planet.
Over the course of the last number of years, we’ve been expanding into the radio frequency domain about 1 gigahertz. This is a very substantial portion of the overall test market. It’s roughly $5 billion to $6 billion of revenue, above 1 gigahertz. We see this as a tremendous growth opportunity for NI going forward.
Now National Instruments we are targeting two fundamental market spaces. Our test and measurement which is roughly a $21 billion market has been our traditional core strength. We started out on a general purpose area leveraging and enhancing traditional instruments and then expanding into doing direct measurement ourselves.
In the last five or six years, we’ve been expanding into semiconductor test for characterizations and validation and now into production tests primarily a mixing of devices and power amplifiers. And in wireless domain, we’ve been moving progressively into characterization design and now high volume production test of all those devices.
In the industrial embedded space, we are leveraging our measurement technology, the need to be able to do a measurement as part of the operation of a machine to allow customers to build machines that are more highly optimized and more effective devices. So an example of this might be an FDA approved optical surgery device for a diabetes patient where you are using a camera to map the eye and then you are using the response to that measurement to control the laser to target cells for treatment.
Another example might be the wind turbine where you are using our technology to monitor the diagnostic on the health of the particular wind turbine. And in those application spaces we are really competing with in-house developed custom electronics the alternative for the customer is to develop that measurement and control electronics in-house as a custom application, or to buy a commercial off the shelf technology from National Instruments and customize that in software through LabVIEW.
The industrial embedded space is the growing part of our business. We anticipate over the course of the next decade that that will approximate roughly 50% of our revenue with a very high value proposition in that market space with high gross margins.
So if we take a quick look at a typical challenge that the customer might be solving with our approach to traditional instrumentation, we can revolve back to the idea of the smartphone which we are all familiar with. When they order for you test a device like a smartphone, you are going to have to test the battery, you are going to test the audio, the speaker, the video, the GPS, the Bluetooth, Wi-Fi, et cetera.
And it’s pretty typical that this will evolve an application for you racking up set of boxes, individual box instruments in a fixed rack, we are going to cable those up to a fixture and you are going to write some software on a PC to automate their execution.
And the challenge for this traditional paradigm for our customers is, each one of these box instruments contains some measurements science, some analog to digital conversion and also contains a computer, they’ve all got a processor, they’ve all got a power supply, they’ve all got a hard drive, they’ve all got a user interface.
They’ve got a lot of redundant hardware in form of the computing platform that you have to purchase in order to access that measurement science. An additional challenge is, most instruments are redesigned every five or six years and so you are buying obsolete computing technology in order to access that measurement types.
Our approach is to disaggregate the components of the measurement. So we’ll take the analog to digital piece. We’ll work with companies like Analog Devices, the Leotech and Maxim. We’ll take their A2B chips, then we’ll put it on a plug-in board and we’ll build a signal conditioning into that particular plug-in board. Then we’ll mate that up with an industrial PC form factor. So we are leveraging standard PC technology including an embedded PCI controller.
So we’ll provide the PC engine, the CPU engine. We’ll leverage an industrial PC form factor to provide the connectivity and we’ll be able to significantly shrink the physical size of the device, because we’ll provide just one processor, one power supply, one hard drive, one set of infrastructure.
So you eliminate a lot of redundant hardware. You are able to integrate it direct into a modern high speed bus, so you are going to get much higher performance and in the end, you are going to get a lower cost, smaller form factor, higher performance device leveraging commercial technology.
In the embedded side, as I said earlier on, the option for our customers is either to build custom hardware that were to design electronics to fit their custom needs or to buy off the shelf hardware from National Instruments that has the measurement capability and the control capability built-in and then customize the application to their specific need, whether it’s a biomedical application or a heavy industrial application or they are monitoring the grid in Houston or they are controlling an oil fracking well somewhere in North Dakota. So very different personalities from a software point of view.
They are able to reuse the same hardware to target those different applications. Our approach in the embedded systems is we are able to compete very effectively for customers who are building machines and volumes of less than 2000 or 3000 a year.
Today, if you are going to build a machine in the tens of thousands, you are still probably going to port to custom electronics, perhaps use the customizing. But in this lower volume and prototyping and low volume production machinery of which there is a tremendous amount in the world today we are able to offer a compelling economic advantage to the customer.
Now switching briefly to financials. We covered this briefly earlier on, you can take a look at our track record of growth over the course of the last 30 odd years. Again, very strong track record of double-digit growth year-over-year with exceptional the two major industrial recessions.
Now when you look at the diversity of our business mix, our average order size is about $5000. So we’ll take well over 250,000 customer orders this year. Individual decisions made by individual engineers across a broad set of industries all over the world.
When you break that down by industry size, no industry is more than 15% of our revenue. Our largest concentration in academia, LabVIEW and our hardware used to teach engineering in over 7000 universities around the world and we really focus on capturing those engineers as LabVIEW users as our software users very early on in their career, but as they become commercial customers, as they move into business when they graduate.
Take a look at our first quarter highlights. We did have a record first quarter despite a difficult market conditions for our markets growing 10% year-over-year. We have record order flow for our software for our core PXI CompactRIO and CompactDAQ platforms. We did however unfortunately exceed our spending plan a little bit in Q1 and we’ve been taking aggressive corrective action to make sure back on our spending plan for the year.
Now, NI works in a market that has very long lifecycles. If you are going to develop a qualified FDA test device for perhaps testing a defibrillator or if you are in the aerospace and defense and you are going to test and qualify an application test for the avionics for the fighter aircraft, you are going to be very reluctant to change your test system over time.
The cost of qualification is quite enormous. And so our products tend to have a 15 to 20 year life in their market. They actually become incrementally more valuable to our customers over time, because of the expense of re-qualification. But we are able to actually increase the price and gross margin of those products as they move throughout that product lifecycle.
On the same frame, developing brand new measurement science is an expensive fairly long-term proposition. So the design cycle for us to bring new products to market in a new market can be from four to five years of development efforts. Now we need to have that long time in market in order to gain that recovery of our profit over that period of time.
And so we try to approach this market with an investment philosophy that matches the timeline of the science and the timeline of the customer. And you’ll see over time, we’ve continued to invest and grow our R&D headcount despite the downturn in 2001 and despite the downturn in 2009, we take a very long-term approach driving organic revenue growth in this market space and we are very persistent and perseverance in ensuring that we are continually working to expand our served available market continuing to be able to serve a higher proportion of needs of our existing customers.
As I said early on, no industry is more than 15% of revenue, academic being the largest segment today at about 12% of revenue, split roughly 50:50 between teaching and research and then we have a number of other market areas that each represent less than 10% of our overall revenue and this diversity has given us the significant amount of stability all the time.
Okay, so let’s take a look at the breakdown of our business then in terms of mix. We use the order size as an indication of the different type of business that flows through our sales force. We sell about 85% of our business direct to the end-user. We do 6% or 7% of revenue that goes to OEMs and about 7% of revenue that goes through our power partners.
When you breakdown the volume, the vast majority of the volume of our orders come for our order values below $20,000. This is a very transactional sales, we’ll do upwards of 200,000 orders at this level over the course of the year. The vast majority of this interaction happens on the web. It’s a very much customer-driven purchase. They will generally have a deep understanding of our software. They will need a new hardware element and they will self-service the hardware element they want and purchase that directly often in repeating year-after-year quarter-after-quarter.
As you move up the value chain, we start to deploy more and more direct sales effort. We have a significant number of four year degreed engineers who are field sales people. They are engaged in a very consultative sales with our customers and you can see quite rapid growth over time from our orders between $20,000 and $100,000 and the most rapid growth have come in the last number of years has been in the high end space areas like embedded in RF where we are driving very large purchases of high system count, high AFP systems.
We did see a big spike last year in Q2 of last year. We fell out of our normal historical seasonal trend and we saw the peak of orders in Q2 last year, heavily driven by significant volume of orders from our largest customer in Q2 of 2012.
Now we take a look at National Instruments core part from an economic point of view, we have a clear market share element to our overall growth. We also have a cyclical component to our overall growth. For many years now, I have been comparing the growth of National Instruments for the global purchasing managers’ index. If they are familiar with the ISM in the United States, you’ll understand that when the ISM is below 50, that means industrial production in the United States is likely to fall going forward and when it’s above 50 it’s going to grow.
We sell to people who design things and build things. So we are very highly connected to this industrial economy. And here you can see the profile of the recession of 2001, the impact of the events of 9/11, the invasion of Iraq and the great recession and our current great moderation or whatever it is we want to call, the current economic timeframe we are going through.
The blue line represents National Instruments’ revenue growth year-over-year in the same timeframe. Our objective fundamentally is to drive separation between the broad economic and NI’s growth. But this correlation of the curve of the slope is likely to stay connected because we are continuing to serve that broad base of the industrial economy. Our objective fundamentally is to be able to drive growth at a rate that’s faster than the broad economy which we’ve fairly been able to do over the course of the last five years.
Unfortunately, when we look at our fundamental end-markets, industrial production globally is actually down about 5% from where it was in Q4 of 2007 and the PMI globally is average roughly at 50 for the last five years. This has been a difficult market, but we’ve been able to drive organic growth in that timeframe.
Now we look at our overall operating model, again going back to the IPO in 1995, when we look at this model, we break out our operating margin. We break out our investment in R&D and we take a look at this over that timeframe.
When I teach an interim class on the financial history of National Instruments, I talk about the periods of the IPO in 1995 to the bubble bursting in the tech world in 2000 as certainly happy period for NI. We are growing really well. We are driving very good profitability, but R&D investment is relatively low.
We did not at that time is a small new public company to fully understand the extent to which the tech bubble itself was driving broad based growth and in 2001 when we saw the recession for the first time in our revenue we really had to make a difficult choice as a small fairly new public company.
Do we focus on shorter term profitability, do we focus on driving longer term organic growth and we made the decision in that timeframe of driving long-term organic growth was the best way to return and create value for shareholders. So we raised R&D spending as a percentage of revenue and we kept it elevated for a significant period of time. That forced us to take some margin hit over the next four or five years and between 2003 and 2008 as we double the size of the company, we drove our operating margins backup significantly targeted towards our goal of 19%.
That was unfortunately interrupted by the great recession in 2009 and then we had a significant improvement in profitability in 2010. In 2011 and 2012, we made significant investments in R&D and our sales force as we are trying to expand our serve available market that has impacted us somewhat in our operating margin and as we look now in 2013 and into 2014, our objectives in this timeframe were to drive organic growth, moderate our expense growth and look to 2014 and 2015 to shoot forward for our target operating model.
Now the core and bedrock of our operating model is our gross margins. This is one of the most boring gross margin curves you are probably going to see. We’ve come from a roughly $40 million, $50 million company in 1993 to roughly $1.25 billion company today. Massive change in mix, massive change in the channel, massive change in many elements, but you can really see from this that we have pricing power, we have differentiation. We are really a software company and over the last twenty years we kept a very, very maniacal focus on investing our R&D dollars in areas where we can get sustainable differentiation.
And I’ll close with just a quick summary of our strategic goals for this year. To drive organic revenue growth in what has been and probably will continue to be especially with the PMI numbers we saw in the US yesterday, a difficult market for test and measurement in 2013. We also want to moderate our expense growth in this timeframe and really focus hard preserving our gross margins and positioning us to be in a good position to deliver on our operating margin targets as we move into 2014 and 2015.
And with that, I’ll take some questions either from the floor or more direct questions.
Let me just start out like ask a few questions, you guys really have a very diverse customer base. We kind of curious to know that what are you seeing in the business especially once along like the semiconductor, the mobile, consumer electronic side?
And it’s a very mix bag to be honest with you and I think that the reason we like that diversity is it gives us stability over time from any one market dynamic. We can start with the challenges first if you like, certainly, the challenges in the test market right now is sequestration and the impact that that has on spending, big science spending by the government in NSF, DOE, et cetera.
That is a definite negative for this marketplace and I think it will continue to be for most of the years. In academic, we see pretty good results so far, but we are now starting to see a real constraint on academic spending in Europe in particular as their austerity measures are starting to bite into that market space. In semiconductors, semiconductor has been a little bit challenged in the last couple of years, especially after the downturn of 2009.
As we look forward when I talk to the CEOs of the semiconductor companies that we serve, I think the general feeling that they have is the inventories are tight. People have been cautious, their customers have been cautious. And I guess, characterize their tone as incrementally positive and looking forward and then in the mobile device, and then there is just a dramatic increase in the volume.
There is huge pressure in the mobile device space for there to be a significant drop in the cost of test per device. Traditionally RF test has been a very small percentage of our revenue and mobile device RF test has been a very smallest percentage of our revenue. So we see a major opportunity in that market space to deliver a disruptive price performance to the marketplace and to gain market share. So we are quite optimistic about the long term opportunity for us in mobile device.
And the mobile device side, it looks like, the comps there are probably like Agilent, Teradyne, those are the test guys that to compete against?
Yes, so our mobile device test, if you count base stations, if you had it in for connectivity for cellular for base stations, it’s roughly and everybody will give you a different number but roughly a $2 billion market in the aggregate.
The dominant players there today have been the three traditional incumbent players, Agilent, which you’re probably very familiar with, Rohde & Schwarz which is the roughly $2.5 billion German private company, Anritsu, which is a large Japanese test provider and LitePoint, subsidiary of Teradyne has been a disruptor in that space in the last couple of years and we are also a disruptor in that space from the point of view that we can provide a modular platform that’s upgradeable software-defined that allows the customer to limit the measurement times they buy to only the pieces they need. So this gives us the opportunity to be very disruptive in that space and we certainly look forward to the opportunity.
And you early defined how for the mobile which can be tested, that seems to be the process like the Agilent, the Rohde and Anritsu but the LitePoint approach seems to be more kind of gear like that you guys have just more a small form factor bought solution focused for the tested device. So what is the differentiation between guys and Teradyne?
And certainly, I don’t want to speak for LitePoint. But my perception on their market position is one, they examine the application area very carefully and they have limited everything or most things in the boxes that weren’t needed for that specific application.
And as a result of that they’ve done a really good job of dramatically reducing the price point for that particular function. And it target high volume functions which have allowed to recoup their R&D investment. Our approach were disruptive to the same general market space is very, very differentiated.
Again, we approach it from a modular point of view, allows the customer to upgrade the processor, as generation’s cycle over time and the most important element of our market position, but differentiated is the use of LabVIEW as the programming approach to program into far more in the instrumentation.
So our approach is, it positively gives the customer control of their custom measurement device and once you make the application software configurable, then the same hardware configuration we sell for 802.11AC testing can also be used for cellular. We can sell that same exact hardware into applications for sector monitoring for electronic warfare applications, for other commercial applications like testing to higher pressure sensors et cetera.
So, if you take these common components, we are able to sell them to a much broader pool of applications, which I believe will ultimately deliver the unit volume that will make us very competitive. And then we allow the customer to upgrade them and to customize in the software.
Many customers in the field are frustrated by the forced obsolescence because the CPU element of the device becomes obsolete or because there is a new software protocol standard that obsoletes their current equipment. So there really is a strong desire in the user community for upgradeable software configurable measurement devices and that is our fundamental differentiation.
Assuming that’s a fairly interesting approach because your clients, and then for the end-customer that’s a good solution of upgrading the software like buying the boxes which should be like Teradyne in case of somebody else? Yet, it feels like Teradyne is probably going to be and revenue to scale out of that business. But you guys are – for the size, so why is that the case?
So, obviously and I will be likely to be over $1.2 billion in test revenue this year. So we have a very large test business. Our penetration into the RF domain is recent. So our ability to deliver value into this market chain this supply chain really is the result of a launch last August of vector signal transceiver which is the combined generator and analyzer in the RF spectrum. So since that product has come to market last August it’s had quite some amount of success and we see a lot of potential in years to come.
And then you – if I look at your margin structure, softer kind of gross margins, but the op margins are not quite big and I understand high R&D spending, but if you look at like, it’s quite not a exact comparison, if you look like DDA for example, they have something in gross margin but they have a very high R&D as opposed to they spend but the op margin is mid-20s now. So what are the levels you have and what’s stopping you?
Sure, the core issue is growth. The challenge DDA have had is not much growth. And so when we look at the picture here, the reality, the test market has been a difficult market for a decade and the last five years are particularly have been quite difficult. We have felt as a company to driving organic growth has been the highest way we can deliver value to shareholders and that the operating margin is something we can relatively easily deal with when we decide to make that a focus.
So in the last five years, we have made really deep R&D investments in the two primary market domains, one being RF test, the other been in the embedded space. So both multi-billion dollar markets. So we have massively expanded our served developer market in the last five years and that’s done from our point of view to help guarantee that we’ll be able to continue to drive organic growth as we look out over the next five to 10 years.
So the way we would position and from my point of view, is I think NI is by far and away the best positioned company in test and measurement to deliver sustained organic revenue growth and as we built out capability and our capacity, we are starting to focus now on the operation margin expansion as we move into 2014 and 2015. But I think in the end, investors will be best served if we can combine rigorous repeatable organic growth with the ability to expand margin over time.
And then, you only started all the presentations speaking about how testing measurement is getting more and more software-based. Do you see a similar trend, especially in the semiconductor test side, because the days are dominant like advantage – sooner not exactly part of those expenses more like hardware driven, and can only becoming as a software solution there could be a dramatic shift in that industry, have you guys looked at that?
I am going to give an example of a platform and the role of software. I use this example of a bagpipe tuner application on the iPhone and bear with me for a minute here while I give you this detail. If you look at and watch the bagpipe guys that they are tuning up now on St. Patrick’s Day, you would find now what they are using is they are using an iPhone to tune bagpipes and it’s a $24.99 application on the iStore to buy an app for bagpipe tuner.
That’s a pretty expensive app right? While it’s expensive, we don’t sell very many of them. But the support guy in Scotland who used to make money sell him a custom hardware for bagpipe tuning. That business has disappeared, because the power of a common platform that got sufficient IO to be able to take your measurement it’s sold in such high volume at a lower price that can be reused for multiple apps.
Really what Apple is doing with this device is changing the personality of this hardware every time you load a new app on to it and that’s the disruptive approach that we bring to the world of test and measurement. Instead of having a sort of hardware that’s really configured only for one application, we are really focused on very high volume, common hardware and then this all customized to the software.
And NI is uniquely positioned with our LabVIEW application software to provide that value. There is no one else in this industry space that has the capability to even come close to that flex. So tell your bagpipe stocks if have them.
If I am, if the goal – if I outsource semiconductor assembly test guy in Taiwan who is spending like a couple of hundred million dollars just with testing equipment, why haven’t they not gone to your approach, maybe just spend like 10 million or 15 million and be a software based approach and dramatically lower asset costs?
So, what we’ve seen very successfully over time as we emerge at a general purpose instrumentation, we have seen tremendous adoption in very high volume by many of our customers. Our focus on a number of strategic areas, one been mobile devices another been energy and the third been semiconductor has really been about two and a half years, we started this back in the fall of 2010.
Those efforts are delivering to customers now solutions more tuned to their applications space and we believe we’ll see very good success with these more optimized solutions targeted at these verticals over time. There is a tremendous amount of leverage and value we can now bring to that market. But the it’s also technology-dependent.
It’s only in recent times, with the expansion of multi-core processing, with the expansion of PCI Express gen 2 gen 3, that the bandwidth transfer data rates and the processing power has become available in commercial technology that we are able to now address these applications with our platform. So I guess, its bit tight in a way and watch and I think you’ll see us be very disruptive in transitioning the industry.
All right, that’s very helpful. And we’ll take a question from the floor.
Just going back to that slide about the higher dollar sales, how are you driving those 100K and above, is that’s going to move the needle relative to the sub-$20,000 level?
So, certainly above 20K and above 100K, that’s where a lot of our growth has come in the last number of years. It’s fundamentally because that’s where we are putting our R&D dollars. We are investing very aggressively in increasing our capability at the high end, so in RF in particular and then also in the embedded space. They tend to be much larger system sales and much higher volume.
So that’s the fundamental driver and we then we are building out a round at the sales force capability to engage with customers at that level, not at the individual engineer level, but at the Director of Test level, the VP, the CEO level. And our ultimate goal is that the senior ranks among our core customers at the CEO level understand the competitive differentiation that we can bring to their business if they adopt our platform and that’s something we’ll be progressively moving. I joke that it took us 37 years to get our first $70 million customer.
I don’t think it will take 37 more years to get our second one. So I think we’ll be very successful and building that value proposition. We’ve been quite successful with the early adopters and we see a significant opportunity to move up the value chain. Thank you for your questions.
When I look at your given the very good balance sheet and since what seen in cash, when you look at your business and the size of this is growing, is that a way to qualify like the minimum operating cash needed to run the business and what do you plan to get success?
This reminds me 2007 conversation. And I mean to be – about it, but our objective from a cash flow point of view is to retain control of decision-making. We certainly don’t need all of our cash in the timeframe to be able to manage the business efficiently and obviously, interfaces are super low right now. So there is a temptation to readjust the structure of the balance sheet in the timeframe given the dynamics.
However, when we look at the highest value that we bring to the business, been able to do drive organic growth and place with it in a business like ours, excuse me, where the timeline for the investment are long, since we are able to invest on the timeframe that makes sense to your business and I have seen many of our peers in the 2008, 2009, 2010 timeframe find themselves in a difficult and have to take investments or headcount actions that were fundamentally very detrimental to their strategic position.
But they became a necessity because it didn’t have the control of their capital structure to allow them to be in charge of decisions. So, we don’t want to end up with a situation but we are asking banker’s provision to invest and that’s why we fundamentally keep that cash position.
We view our priorities for the use to cash. In this timeframe, number one is towards dividend, number two is opportunistic stock repurchases, and then to a much lesser extent strategic acquisitions.
Really sort of just squeezing one more, obviously you have like different verticals and very diverse customer base, which is really interesting and quite a bit of concentration on the side of things, but among all the other ones, we are trying to characterize that the highest growth and which one would you consider in a few years from now would be a biggest trend of your revenues, your dollars?
Okay, certainly we’ll take products and then maybe I’ll address the verticals for a second. On the product side, we definitely see RF, test and embedded control as two very strong areas to growth for National Instruments in the next five even up to ten years. From a vertical industry point of view, I think I would obviously, mobile devices, and by that I mean, where wireless technologies take us, if we are all going to be wearing wireless technologies in the future, which I believe is actually a relative possibility, whether it’s your glasses or in some other form factor, wireless test is going to have to get a lot less expensive for the device manufacturers to be able to achieve that goal.
And so we see a broadening of the wireless test need and a significant expansion to the unit volume of devices and we want to participate in that. Now we also starting and being able to move up the value chain in RF over time. From a vertical point, from an embedded point of view, I think we’ve got a tremendous market opportunity and very differentiated technology with really no core competitor.
From a vertical point of view, we look to our opportunities. We see a very significant opportunity for us in energy to be disruptive whether it’s in machine control monitoring or whether it’s on the gas, whether it’s on the grid, alternative technologies. In the silicon side, the characterization of validation we see a very strong opportunity there and then in mobile devices. So those are the three industries we see really good prospects.
I think we are running out of time. Thank you very much Alex. Thank you very much I appreciate the time today.
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